Not All Tax Cuts are Created Equal

While tax cuts can encourage economic growth, it is important for Congress to remember that some work better than others – and to keep the big fiscal picture in mind. That’s the advice Diane Lim Rogers, chief economist for The Concord Coalition, offered last week in her testimony to the House Budget Committee.

“Tax cuts all have benefits,” she said, “but the first thing one learns in an economics class is in a world of scarce resources, we maximize well-being by weighing costs against benefits, and at the margin starting from where we are right now.” Although some tax cuts may help particular households and businesses, she said, they “don’t necessarily pass society’s cost-benefit test.”

Rogers also said it was important to distinguish between tax policies that can increase demand for goods and services, and those that can increase the supply of labor and capital. In an economy recovering from recession, Rogers said, policies to increase demand should take precedence.

The Bush tax cuts that were extended last year, she said, “are not the kind of tax cuts that provide high ‘bang per buck’ in a recessionary economy.” Nor were they particularly effective at growing the supply side of the economy, as even the Bush administration’s Treasury Department acknowledged.

Rogers also cautioned against using historical data to determine the appropriate level of future taxation. “Given the dramatic changes in the structure of our population and the continued growth and evolution of our economy,” Rogers said, “it is difficult to see how what was right over the past 40 years – and it wasn’t even quite adequate then – could be right over the next 40 years.”